How to set up an insider-trading network

By Felix Salmon

May 12, 2011

Peter Lattman and Azam Ahmed are here to tell you exactly how to do it, using the secrets of the master of the artform, Raj Rajaratnam. "
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Do you want to set up a network of insider-trading tipsters? Well, Peter Lattman and Azam Ahmed are here to tell you exactly how to do it, using the secrets of the master of the art form, Raj Rajaratnam.

Different techniques work for different people, of course, but often the direct way — a lot of money, mixed with equally large amounts of flattery — is the easiest:

As Raj Rajaratnam and Anil Kumar, a McKinsey consultant, walked out of a fund-raiser in Manhattan, Mr. Rajaratnam pulled his old friend aside and made him an offer: would Mr. Kumar provide him with insights for $500,000 a year?

“You have such good knowledge that is worth a lot of money to me,” he said, according to Mr. Kumar.

Mr. Kumar faced an agonizing choice. His employer barred its executives from outside consulting, but an extra half-million dollars a year — and the chance to do business with a powerful hedge fund manager — was tantalizing.

Weeks later, Mr. Kumar accepted.

It’s worth noting that at this point neither man has done anything illegal. If found out, Kumar could lose his job — but being fired, even for cause, is not a criminal offense.

Yet the die, at this point, has been cast. Raj has both a carrot and a stick with which to control Kumar: money, and the fact that he knows that Kumar has been accepting it. The two are bound into a secret conspiracy, and once you’re in such a thing it’s impossible to get out without inflicting serious pain onto yourself.

So when Raj started asking for inside information — when he started asking Kumar to do things which were actually criminal — it was easy for Kumar to say yes, and very hard for him to say no.

With other people, Raj used different techniques. Adam Smith (yes, Raj really was getting inside information from a man named Adam Smith) was probably the easiest: Raj simply brought him into Galleon as an employee, making their interests pretty much fully aligned.

With Rajiv Goel, there was a real friendship — or at least Goel thought there was. And while money changed hands as well, it wasn’t money for tips, not directly: it was more that the rich friend, Raj, helped out with things like buying a house or caring for a sick parent, while the poorer friend, Goel, desperately tried to curry Raj’s approval in the only way that he could get it.

Incidentally, only in the world of Wall Street is it unsurprising to find mid-level Intel executives being described as “hapless” and “in need of money” — Goel had a job that most people can only dream of, but was permanently dissatisfied. Maybe if his friends had less money than he did, instead of more — if they were in the bottom 99% of the population, rather than the top 0.01% — then he would have been happier, and would have felt much richer. Lesson of the story: don’t vacation with people who are a lot richer than you are.

And then there’s Kumar, who’s the weirdest of the lot, seeing as how he was already earning several million dollars a year at McKinsey. He was set for life, yet he accepted Raj’s $500,000 a year, and also the occasional bonus:

In 2006, Mr. Kumar agreed to another compensation scheme: Mr. Rajaratnam would pay him a year-end bonus based on his annual performance. Mr. Kumar proved his worth that year, providing him with details about secret merger negotiations between Advanced Micro Devices and ATI Technologies…

$1 million is a lot of money for almost anyone, but in Kumar’s case it was not enough to change his standard of living at all, and it didn’t make him significantly richer than he was before. So how come Raj’s money had so much effect on him?

Kumar sticks out here in other ways, too — he’s the only informant who could be considered even more successful than Raj was, at least professionally if not in terms of raw cash. Raj had money, more money than he really knew what to do with, but Kumar had much more societal acceptance and prestige — things you definitely need if you’re going to make it all the way to the board of Goldman Sachs.

And, of course, Kumar still hasn’t been criminally charged. But I suspect that particular shoe is going to drop at some point. Now that Raj has been convicted of all 14 counts, Kumar is surely next.

Update: As EnricoPalazzo points out in the comments, it’s Rajat Gupta, not Anil Kumar, who made it onto the board of Goldman Sachs.